Wed, 31 Jul 2013
Despite a recent rise, lending rates remain near historic lows, says real estate expert Ilyce Glink, who also offers guidance on credit scores and encourages homesellers to be realistic in their expectations.
Adam Zoll: The housing market's recovery has been one of the more pleasant economic stories of 2013 so far. But will rising interest rates derail the housing recovery? Here to talk about this and other topics is Ilyce Glink. She is an author, a nationally syndicated real estate columnist, and the publisher of the personal-finance website, ThinkGlink.com.
Ilyce, thanks for joining me.
Ilyce Glink: It's a pleasure.
Zoll: So in the past few weeks we've seen mortgage rates really start to rise off these historic lows that we had been seeing. How are rising interest rates likely to affect the real estate market?
Glink: In the end, everybody is going to look back three, four years from now and say, "What was the big fuss about? 4.5%, or today it was 4.25%. They're going to think, "That was great." Just like two years ago, they also thought these were historic low interest rates. "Rush out and get them; they're not going to last." And surprise, surprise because nobody can predict anything in this market anymore, interest rates fell.
Now, they've come up and you would have thought that this was the death knell for real estate. You hear pundits talk and the media talks about it. But the reality is we just need some time to get used to the idea that mortgage interest rates are going to head up to a more normal level. What's normal? Well, since 1993 when mortgage interest rates fell below 6.5% for I think the first time since World War II, we're going to run back up. We're nowhere near 6.0%. We're at 4.0%, 4.5%, 4.25%. If you go for 15-year loans, you still get 3.5%. But they are trending up, and we are going to see some movement up. What I love to remind everybody is the only reason we were at 3.5% is because the economy tanked, and it's still not completely fixed.
Zoll: Let's talk about the effect that a rising-mortgage-rate environment has on people with different profiles. Let's talk first about first-time buyers. If you are first-time homebuyer, you're looking at these mortgage rates going up. I don't want to use the word "panic," but should you be concerned that you better jump into the market sooner rather than later?
Glink: The good thing is that you have a lot of control as a first-time homebuyer. What happens when mortgage interest rates are about 4.0% or 4.5% for a 30-year fixed-rate loan is you can typically buy--as long as you have a down payment--about 3 to 4 your gross income. If interest rates go up, you can buy a cheaper house. What people are forgetting is that home prices are also down still at historic lows. Yes, we've seen them go up 10%, but if you were in Phoenix or Las Vegas, home prices were down 50%, 60%, or 70%. Going up 10% or even 20% a year is more of a math game than anything else. I think in Chicago, where I live, you have seen prices down 30%-35%. Some neighborhoods have popped up a little bit, but you're not getting the appraisals in at the place where sky-high prices from 2005 and 2006 were going to appraise out. There are some controls built-in. You as a first time buyer, just go buy a less expensive house. It's OK. You don't have to live in a house with a pool the first time out.
Zoll: It's still an attractive market because those prices have been depressed for so long. What about from the standpoint of seller? Are the rising prices likely to bring down prices from the seller's standpoint, and therefore make them more anxious about selling sooner?
Glink: Sellers have been desperate and anxious for seven years running, and they are getting a little bit of traction now. I don't want to take anything away from that. I think that sellers have to understand that the market is never going to be a straight line. It's never been anything other than up and down, up and down, up and down. We see cycles, but even within those cycles it's very much a bumpy bottom or a jaggedy edge. Some months it's going to be stronger. Some neighborhoods are going to be stronger, and then they get weaker again.
Sellers have to be realistic. If you want to sell and get out and go move somewhere else and buy something else, great. Be realistic on your price point. If you can stand on your front doorstep and you see foreclosures all around you in your neighborhood, you haven't recovered yet. You're not going to get top dollar for that property. But if all the foreclosures have been sopped up, you're probably going to have an easier time than you've had in seven years to sell your house.
Zoll: What about people who are looking to trade up? They are sort of caught in between. They are trying to buy and sell at roughly the same time. Is there an effective strategy that you would recommend for people in that situation?
Glink: Yes, it's called renting in between, something I did myself 20 years ago. I think people think that everything is always going to time out, and sometimes that works. But in the last seven years if you tried to sell and then buy, or buy and then think you were going to be able to sell quickly, everybody got fooled. A lot of people went into bankruptcy. A lot of people let their houses go back to the bank in foreclosures, a deed in lieu of foreclosures. Timing it is really tough.
My advice, always try to sell, and if you have to move into a rental because you've sold much faster than you expected and yet the inventory to buy is not really there, you go rent for six months or a year. Just make sure you have an out clause, and then you can start really looking for the home you want to buy, not the home you have to settle for simply because you couldn't find anything else in your time frame.
Zoll: What about maybe older couples who are actually looking to downsize? Maybe they're empty-nesters now. How does the current market environment translate for their concerns?
Glink: If they are looking to downsize and buy a new home, they are going to have the same trouble that anybody else is doing: selling and then buying. The smaller the home, the more you get into that first-time buyer or first trade-up buyer price range, and the extra low interest rates are serving to give you a lot more buying power. If prior you might have been able limited to a $200,000 or $250,000 price range, you now may be able to go to $300,000 or $350,000 simply because interest rates are at these ridiculously low, and I mean that on a historical basis, low place. For seniors who are trading again, it's a pain in the neck to have to pack up and move twice, but it's a whole lot better than being forced into buying something that may not be affordable for you once you get on a fixed income. We've seen how seniors have suffered with fixed income with interest rates where they are.
Zoll: Last of all, how about for people who still haven't refinanced, who have been putting it off for whatever reason, now might be the time for them to get off the fence?
Glink: I've been saying for the last three or four years, just get off the fence and go refinance because if interest rates go down, you can refinance again. There is no holdback once you can actually qualify for those refis. For so many people, I can't believe how many people still have 6.0%, 6.5%, or 7.0% interest rates on their loans. They call me or they call into my radio show [and ask], "Should I refinance this?" I'm thinking to myself, "Where have you been? Where were you when interest rates were 3.5% for 30-year fixed or under 3.0% for 10-year? Where were you then?" But, fine, do it now.
Zoll: Right. Switching gears now, let's talk a little about people who are applying for a loan, especially people who haven't applied for a loan since the financial crisis because now credit is a little harder to come by. The qualifications are higher than they were before. What kind of guidance can you give to people in terms of what kind of a credit score they're going to need to get these best interest rates? What can they do to improve their credit score?
Glink: My understanding from talking to lenders is that they really want to see credit scores for the top tier rates at 760 and above. Sometimes you might find somebody at 740 or above, or 780 and above. It varies, which is weird because Fanny Mae, Freddie Mac, and Federal Housing Administration are buying 90%-plus of all the loans. You think to yourself, "Why isn't here all the same?" which is another question for another day. But it isn't the same. You really want to get your score into the mid- to upper 700 tier. The closer to 800 or above 800, the better off you'll be.
For people who aren't there yet, and really they are watching how many years since your foreclosure and your short-sale--two to three years for short sale, three to five years in the penalty box for a foreclosure. Bankruptcy is also three to five years. It could be longer but just depends on the extenuating circumstances. If you've got one of those, you've got to be preparing because your credit may be high enough by now. Maybe you're back into the upper 600s or even low 700s, but you're still in that penalty box of time. You can start shopping around, but I wouldn't actually do any official applications because you don't want to ding your credit history with too much stuff.
What we talk about when we look at fixing credit is the same basic things apply: pay your bills on time in full before the end of the month. You really want to get that on-time thing. And if you can actually automate the bill pay, having everything be a direct pay right from your bank account, so much the better. You're never going to forget; you're never going to be late; it's all good. One trick that I employ that if you're in control of your credit that you could do is we stack almost all of our incidental bills on to our credit card every month. We get [I think] 1% or 2% cash back; I'm big on cash back. But there are all kind of affinity credit cards. We stack most of those bills on there, and then we pay that off once a month.
For us that works. We get the cash back, as well. But if you're not trustworthy with credit and you don't remember to pay those bills, then everything is going to be late, and you really want to stay on top of it. Again, it's length of credit; the amount of credit that you have; the amount of available credit, so your maximum amount that you have and what percentage of it you use; what you're paying on time, hopefully everything--those are all the really key pieces of what makes up a credit score.
Zoll: Ilyce, thanks very much for joining us today and sharing your thoughts about the current state of the real estate market.
Glink: Happy to do it.
Zoll: For Morningstar, I'm Adam Zoll. Thanks for watching.